Differences between adjustable and fixed loans

A fixed-rate loan features the same payment for the entire duration of the mortgage. The property taxes and homeowners insurance will increase over time, but in general, payment amounts on these types of loans change little over the life of the loan.

Your first few years of payments on a fixed-rate loan go mostly toward interest. This proportion gradually reverses as the loan ages.

You can choose a fixed-rate loan to lock in a low interest rate. Borrowers select fixed-rate loans when interest rates are low and they wish to lock in at this lower rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can provide greater consistency in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we'd love to assist you in locking a fixed-rate at a good rate. Call 1st Credential Mortgage Inc at (281) 778-0805 to discuss how we can help.

There are many different kinds of Adjustable Rate Mortgages. Generally, the interest for ARMs are determined by an outside index. A few of these are: the 6-month CD rate, the 1 year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

The majority of ARMs feature this cap, which means they won't increase over a specified amount in a given period of time. Some ARMs won't increase more than two percent per year, regardless of the underlying interest rate. Your loan may have a "payment cap" that instead of capping the interest rate directly, caps the amount that your payment can go up in a given period. In addition, the great majority of ARM programs feature a "lifetime cap" — this cap means that the interest rate won't exceed the capped amount.

ARMs usually start at a very low rate that may increase as the loan ages. You've likely heard of 5/1 or 3/1 ARMs. For these loans, the introductory rate is fixed for three or five years. After this period it adjusts every year. These loans are fixed for a certain number of years (3 or 5), then they adjust. Loans like this are often best for borrowers who anticipate moving within three or five years. These types of adjustable rate programs are best for people who plan to sell their house or refinance before the initial lock expires.

You might choose an Adjustable Rate Mortgage to take advantage of a lower initial rate and plan on moving, refinancing or absorbing the higher rate after the introductory rate expires. ARMs can be risky if property values decrease and borrowers are unable to sell or refinance their loan.

Have questions about mortgage loans? Call us at (281) 778-0805. We answer questions about different types of loans every day.

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